S&P cuts Toyota's debt rating

3/6/2011

Toyota Motor Corp., the world’s biggest carmaker, had its long-term debt rating cut by Standard & Poor’s, which cited the company’s “weak” profitability, five weeks after Japan’s credit rating was lowered.

Toyota’s rating was reduced one step to AA-, the fourth- highest level, from AA, S&P said today, giving the debt a “stable” outlook. Moody’s Investors Service rates the Toyota City, Japan-based carmaker’s debt Aa2, the third-highest level.

"The downgrade reflects our opinion that Toyota's profitability is unlikely to recover in the next one to two years to a level that we view as appropriate for the rating," S&P said in a statement.

Toyota, whose net income declined 39 percent to 93.6 billion yen ($1.1 billion) in the quarter ended Dec. 31, last week recalled 2.2 million vehicles. That followed earlier recalls of more than 8 million cars for repairs related to sudden unintended acceleration.

"The downgrade is regrettable," said Keisuke Kirimoto, a Toyota spokesman. "However we want to continue to take care of each of our customers and work toward improving our profitability in the long term."

Toyota's rating by S&P remains the highest among global carmakers. Honda Motor Co. is a notch behind with a long-term rating of A+ from S&P. Volkswagen AG's rating is A-, Nissan Motor Co. and Daimler AG rate BBB+, and Hyundai Motor Co. is BBB. Ford Motor Co., the most profitable U.S. automaker, and General Motors Co. have BB- ratings from S&P, or three levels below investment grade.

Toyota's American depositary receipts fell $1.20, or 1.3 percent, to $90.99 at 4:03 p.m. in New York Stock Exchange composite trading. They've gained 16 percent this year.

Sovereign Ratings

On Feb. 8, Toyota boosted its full-year profit forecast by 40 percent, saying net income may more than double to 490 billion yen for the 12 months ending March 31. Toyota followed Honda in boosting its earnings estimates as the global auto industry recovers from the financial crisis.

"The downgrade shouldn't have any big impact on Toyota's ability to raise funds," said Masataka Kunugimoto, an analyst at Nomura Securities Co. in Tokyo, adding that the downgrade may be triggered by the recent lowering of Japan's rating. "It doesn't mean Toyota's credit is shaky."

S&P lowered Japan's credit rating on Jan. 27 for the first time in nine years as persistent deflation and political gridlock undermine efforts to reduce a 943 trillion yen debt burden. The world's most indebted nation is now ranked at AA-, putting the country on a par with China, which likely passed Japan last year to become the second-largest economy.

Toyota was rattled by recalls totaling more than 10 million vehicles over the past 1 1/2 years, most of which related to the risk of cars uncontrollably speeding out of control.

U.S. Probe

President Akio Toyoda appeared before the U.S. Congress last year to testify on the recalls. The U.S. National Highway Traffic Safety Administration last month wrapped up a probe into the matter, freeing the company from further government allegations related to it.

The carmaker on Feb. 25 won approval for a $10 million settlement with the family of a California Highway Patrol officer who, along with three others, died in a crash in August 2009 after he couldn't bring his Lexus ES350 sedan to a stop.

Toyota and rivals including VW and GM, as well as their suppliers, have been grappling with rising raw-material prices that inflate costs. Rubber prices may advance as much as 32 percent to 605 yen a kilogram ($7,407 a metric ton) by December, according to the median estimate of 10 analysts and traders last month.

Steel prices will rise faster than raw-material costs in the first half of 2011 as steelmakers themselves cope with higher iron ore costs, European trade association Eurofer said last month.

Denso, Aisin Seiki

Toyota's "profitability is still weak, its pace of recovery is slower than those of Japanese peers, and its profitability might remain under pressure from higher raw material prices and gasoline prices as well as the strong yen," S&P said in today's statement.

S&P also cut its debt ratings for Denso Corp., a Toyota- affiliated auto-parts maker, to "AA-" form "AA" following the Toyota downgrade.

Toyota's rating was reduced one step to AA-, the fourth- highest level, from AA, S&P said today, giving the debt a "stable" outlook. Moody's Investors Service rates the Toyota City, Japan-based carmaker's debt Aa2, the third-highest level.

The ratings agency also revised to stable from negative its outlook on the long-term corporate debt ratings of Toyota group suppliers Toyota Industries Corp. and Aisin Seiki Co. Ltd., saying the suppliers will probably maintain their "recovery in profitability and financial standings."